2019 (2) TMI 14 - AT - Service Tax

Classification of services - credit card services or not - distinct contractual (service) relationships - Interchange Fees which accrues to the appellant as a fallout of each credit card transactions by a holder of a credit card issued by the former - taxability or otherwise - Held that - In a very recent decision of the Tribunal in the case of ABN Amro 2018 (7) TMI 1750 - CESTAT ALLAHABAD , it has been categorically held that the amount received by the appellant does not qualify as credit card services that when acquiring bank has discharged service tax liability on the entire amount, no service tax is payable by the appellant and that the amount offered by the appellant does not qualify a credit - the very issue that is in dispute in the present appeal has been conclusive decided by the Tribunal in the final order (ABN Amro) against Revenue. The impugned order is not sustainable - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Taxability of Interchange Fees under Credit Card Services.
2. Service provider-service recipient relationship.
3. Double taxation.
4. Nature of Interchange Fees.
5. Applicability of the Standard Chartered Bank judgment.
6. Limitation period for issuing show cause notices.
7. Procedural aspects and deviations in the adjudication process.

Issue-wise Detailed Analysis:

1. Taxability of Interchange Fees under Credit Card Services:
The core issue revolves around whether Interchange Fees earned by the Issuing Bank should be subjected to service tax under the taxing entry for "Credit Card Services." The Revenue's stance is that Interchange Fees are taxable as they are part of the Merchant Discount Rate (MDR) and should be considered service income. The appellant contends that the entire MDR, including Interchange Fees, has already been subjected to service tax by the Acquiring Bank, and taxing it again would amount to double taxation.

2. Service provider-service recipient relationship:
The appellant argues that there is no service provider-service recipient relationship between the Issuing Bank and the Acquiring Bank, as the Interchange Fees are merely a share of the MDR and not a separate consideration for any service. The adjudicating authority, however, views the Interchange Fees as consideration for services rendered by the Issuing Bank to the Card Network and the Acquiring Bank.

3. Double taxation:
The appellant asserts that since the Acquiring Bank has already paid service tax on the entire MDR, taxing the Interchange Fees again in the hands of the Issuing Bank would result in double taxation. The adjudicating authority did not find sufficient proof that the entire MDR was taxed and maintained that the Interchange Fees should be taxed separately.

4. Nature of Interchange Fees:
The appellant claims that the Interchange Fees are in the nature of "interest on loan" and should not be subjected to service tax. They reference the US Tax Court's decision in Capital One Financial Corporation, which held that Interchange Fees compensate banks for the costs of lending money and are treated as interest. The adjudicating authority, however, views the Interchange Fees as consideration for facilitating credit card transactions.

5. Applicability of the Standard Chartered Bank judgment:
The adjudicating authority relied on the Larger Bench decision in Standard Chartered Bank, which dealt with whether Interchange Fees fell within the scope of Banking and Other Financial Services (BFS). The appellant argues that this case is not applicable as the demand in the present case is raised under the taxing entry for Credit Card Services, which has a different definition. The Tribunal agreed with the appellant, distinguishing the present case from Standard Chartered Bank.

6. Limitation period for issuing show cause notices:
The appellant contends that the proceedings are hit by limitation, as the issue is common to the entire banking industry and not unique to them. They argue that the CBEC was fully aware of the issue, and clarifications were awaited. Therefore, the extended period of limitation should not apply. The adjudicating authority did not address this contention adequately.

7. Procedural aspects and deviations in the adjudication process:
The appellant argues that the impugned order traverses beyond the scope of the show cause notice by confirming the demand on a different basis than initially proposed. The show cause notices alleged that the Interchange Fees were consideration for services rendered to the Acquiring Bank, while the impugned order states that the fees are for services to the Card Network. This deviation was not addressed by the adjudicating authority.

Conclusion:
The Tribunal found that the issue in dispute concerns the taxability of Interchange Fees, which accrue to the appellant as a result of credit card transactions. It was concluded that the Standard Chartered Bank decision did not apply to the present case. The Tribunal also referenced the recent decision in ABN Amro Bank, which held that when the Acquiring Bank has discharged service tax liability on the entire amount, no service tax is payable by the Issuing Bank. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief. The miscellaneous application filed by Revenue for change of cause title was also allowed.

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